Mid-Morning Look

Thursday, July 20, 2023

U.S. stocks open lower, quickly bounce, then tumble to fresh lows following a handful of mixed earnings results and guidance in the technology and financial sector as major averages slip for the first time this week. Tech and Consumer Discretionary sectors fell as NFLX sales missed analysts’ estimates with lower guidance (though subs crushed ests) and Tesla fell after warned about shrinking profitability. Semiconductors slid as TSM guided a lower sales outlook for the year. Bank stocks mixed after results while shares of Discover (DFS) tanked after it disclosed a regulatory review over some of its credit products. In banks, KEY Q2 profit plunged 50% and it forecast a decline in net interest income, TFC missed estimates for second-quarter profit, FITB profit topped expectations, even as it trimmed its growth forecast for full-year NII. In U.S. economic data, the number of Americans who applied for unemployment benefits last week fell to a two-month low of 228,000, reaffirming that the U.S. jobs market is quite strong. Existing Home Sales came in a little below estimate while Philly manufacturing in negative territory 11-months in a row. Treasury yields popping to highs here with the 10-yr up 10-bps to 3.844% and the 2-yr up 11 bps to 4.865%, along with a bounce in the US dollar.

Economic Data

·     Jobless Claims fell to 228K in the latest week from 237K prior (est. 242K); 4-week moving average fell to 237,500 from 246,750 prior and continued claims rose to 1.754M from 1.721M prior.

·     Existing Home Sales for June fell -3.3% to 4.16M unit rate vs. est. 4.2M; June inventory of homes for sale 1.08 mln units, 3.1 months’ worth; June national median home price for existing homes $410,200, -0.9 pct from June 2022.

·     Philadelphia Fed’s manufacturing gauge remains in negative territory in July for 11th straight month, falling -13.5 vs. -10.0 consensus and -13.7 in June as Business Conditions rose +29.1 vs. +12.7 prior, Employment -1.0 vs. -0.4 prior, New Orders tumbled -15.9 vs. -11.0 prior and the Prices Paid component rose +9.50 vs. +10.50 prior.

·     Leading Index Change MoM Actual -0.7% (Forecast -0.6%, Previous -0.7%).

Sector Movers Today

·     In transports: earnings from airline UAL topped consensus ($5.03 vs. $4.03) and lifted its full-year profit outlook to $11-$12 from $10-$12 prior (and above consensus $9.77) after posting the highest ever quarterly earnings on booming demand for international travel. AAL Q2 EPS $1.92 topped ests. $1.58 and revs $14.1B beats $13.7B est. while raises FY23 EPS outlook to $3.00-3.75 vs. prior view $2.50-$3.50. In car rental, CAR downgraded from Buy to Hold at Deutsche bank saying simply put, the stock has rallied 47% (vs a 9% rise in the S&P 500) since DBAB’s May 30 post-close upgrade at $163.27 and is now less than 10% away from its $263 price target.

·     In regional banks: FITB Q2 EPS of $0.87 beat by $0.04 as net interest income (NII) jumped 9% to $1.46 billion but lowered its full-year NII growth forecast range to 3% to 5%, from 7% to 10%; EWBC Q2 EPS of $2.20 misses by $0.01, revenue of $645M misses by $14.29M; KEY Q2 EPS $0.27 vs. est. $0.31; Q2 revs $1.6B vs. est. $1.63B; Q2 CET1 capital ratio 9.2%; qtrly provision for credit losses was $167M, compared to $45M y/y and $139M in Q1 Q2 average deposits totaled $142.9B, a decrease of $4.6B y/y; TFC Q2 EPS $0.92 vs. est. $1.01; Q2 revs $5.97B vs. est. $5.99B; Q2 adj. pre provision net rev (PPNR) declined to $2.41 bln vs $2.45 bln a year earlier; ZION reported better-than-expected PPNR in 2Q23 with an upside in net interest and fee income, while credit quality trends were positive in 2Q23, and the ACL increased by 5bps Q/Q.

·     In P&C Insurance: TRV reported a 98% decline in quarterly profit citing severe wind and hailstorms pushing up its catastrophe losses, while revs rose 11% y/y to $10.1B from $9.14B a year ago; said posts record net written premiums of $10.3 bln, up 14% y/y. ALL said June catastrophe loss $1.01b, +14% m/m and that total Q2 cat losses for $2.7B pre-tax; THG said experienced significant catastrophe losses in Q2 of about $262M, before taxes, or 18.5 points of net earned premium and expects to report a Q2 combined ratio of 111.3%, and combined ratio, excluding catastrophes of 92.8%.

Stock GAINERS

·     CTLT +3%; after Bloomberg reported Elliott Investment Management has built a significant stake in the co and is pushing for changes to the company’s board. https://tinyurl.com/yc382xrp

·     DHI ; after Q3 top/bottom line beat and raised its FY23 revenue outlook to $34.7B-$35.1B from $31.5B-$33B prior as supply of affordable existing homes remains limited; said Q2 net sales orders grew 37% to 22,879 homes and rose 26% in value to $8.7 billion.

·     JNJ +4%; beat and raise quarter as Q2 adj EPS $2.80 vs. est. $2.62; Q2 revs $25.5B vs. est. $24.63B; raises FY23 adjusted EPS to $10.70-$10.80 from $10.60-$10.70 (est. $10.65) and boosts FY23 revenue view to $98.8B-$99.8B from $97.9B-$98.9B (est. $98.96B).

·     TRV +2%; reported a 98% decline in quarterly profit citing severe wind and hailstorms pushing up its catastrophe losses, while revs rose 11% y/y to $10.1B from $9.14B a year ago; said posts record net written premiums of $10.3 bln, up 14% y/y.

·     UAL +2%; topped consensus ($5.03 vs. $4.03) and lifted its full-year profit outlook to $11-$12 from $10-$12 prior (and above consensus $9.77).

·     ZION +8%; reported better-than-expected PPNR in 2Q23 with an upside in net interest and fee income, while credit quality trends were positive in 2Q23.

Stock LAGGARDS

·     AA -4%; Q2 adj. EBITDA missed consensus expectations slightly but was above estimate, although driven by lower transformation/other costs, while segment EBITDA missed.

·     CCI -4%; lowered its core Tower leasing guidance by $10M ($130M new midpoint vs $140M previously as per KeyBanc), which implies a much softer 2H leasing than originally anticipated.

·     DFS -15%; after saying it pausing buybacks and posted 2Q charge-offs that are higher than expected; 2023 guidance was reduced on several metrics.

·     EL -3%; downgraded from Overweight to Equal Weight at Barclays and cut tgt to $193 from $210.

·     NFLX -8%; reported 5.89MM net member adds in 2Q, well above consensus of 2.09M helped by paid sharing & Originals slate while saying Q3 net adds are expected to be like 2Q levels, above ests, but shares fell after Q2 sales missed ests and guided Q3 revs below views.

·     TSLA -5%; EPS beat fueled primarily by below the operating line benefits ($0.91 vs. est. $0.82) and revs $24.93B vs. est. $24.48B; posts Q2 margin at 18.2%, lower than 19.3% in Q1; also operating income of $2.4B missed views for $2.7B and fell 2.6% y/y and FCF was about $1B vs. est. $1.88B.

·     TSM -4%; cut its annual rev outlook and postponed the start of production at its Arizona project to 2025; said Q2 revenue fell 14% y/y to $15.68B while Q2 net profit fell 23% from a year earlier.

·     VIR -43%; after announcing topline data from phase 2 PENINSULA trial evaluating VIR-2482 for the prevention of seasonal influenza A illness; said it did not meet primary or secondary efficacy endpoints.